Cummins Inc. (CMI) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2015 Meritor, Incorporated Earnings Conference Call. My name is Alison and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Carl Anderson, Vice President and Treasurer. Please proceed, sir. Carl D. Anderson - Treasurer, VP & Head-Investor Relations: Thank you, Alison. Good morning, everyone, and welcome to Meritor's second quarter 2015 earnings call. On the call today, we have Ike Evans, Jay Craig and Kevin Nowlan. The slides accompanying today's call are available at meritor.com. We'll refer to the slides in our discussion this morning. The content of this conference call, which we are recording, is the property of Meritor, Inc. It's protected by U.S. and international copyright law and may not be rebroadcast without the expressed written consent of Meritor. We consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me now refer you to slide two for a more complete disclosure of the risks that could affect our results. To the extent we'll refer to any non-GAAP measures in our call, you'll find the reconciliation to GAAP in the slides on our website. Now I'll turn the call over to Ike. Ike J. Evans - Chairman & Chief Executive Officer: Thank you, Carl, and good morning. I assume most of you have seen our two press releases this morning, so you know that we've continued to expand EBITDA margin in the quarter and we've also made an important management change that we'll talk about today as well. This is an exciting time for Meritor. We're meeting our commitments we made under the umbrella of M2016. We're executing our management succession plan and we're taking steps to strengthen and grow our core business with robust product development and launch cycle. Let's turn to slide three for a look at the quarter. Our adjusted EBITDA margin for the second quarter was 10.1% on revenue; that's down $90 million year-over-year. This represents a 170 basis point improvement from the same quarter in fiscal 2014. Adjusted diluted earnings per share from continuing operations for the quarter also improved $0.17 year-over-year. The decrease in revenue that we saw this quarter was driven primarily by continued weak commercial truck production in Brazil, actually the lowest volumes we've seen there in a decade, and in China, as well as the depreciation of currency primarily in South America and Europe. In July of last year, we announced that we'd repurchase up to $210 million of our equity or equity-linked securities. During the second quarter, we began that program by repurchasing $31 million of securities. We've also said this is the first time since 2008 that we've been in a position to return value directly to Meritor shareholders. We're on track to complete the entire repurchase program by the end of fiscal year 2016. As you look at our full year guidance, we're raising our outlook for adjusted EBITDA margin and earnings per share. The margin improvement we're anticipating for the year is performance driven. This along with our expectation of a lower effective tax rate in fiscal 2015 is driving the expected improvement in earnings per share, of which Kevin will provide more detail. Let's turn to slide four. As I said, I'm very pleased to tell you that we've taken an important step in our management succession plan. Effective immediately, I will be transitioning to a new role as Executive Chairman and Jay Craig, currently President and Chief Operating Officer will become Meritor's next CEO and President. When I was appointed CEO, the board and I made succession planning a top priority. We wanted to ensure that we identified the right leader for Meritor's next phase of growth and development. I have worked with Jay since 2006 as a board member and we've worked closely together in a partnership relationship the last two years in implementing our M2016 strategy. This is the natural evolution of that partnership. Together with an outstanding management team, we've turned challenges into opportunities and today Meritor is stronger than it's ever been. In my new role, I'll work closely with Jay and the rest of the management team to achieve our M2016 goals and set the future direction of the company beyond 2016. And I'll remain actively engaged as we establish our path to drive continued increases in shareholder value. Jay is a talented executive and an excellent leader. As you recall, he has served in a number of key financial and operational roles at the company and was named President and Chief Operating Officer in 2014. Over the past couple of years, Jay has strengthened our customer relationships, driven a more robust product development cycle and focused on improving operational performance of our company. The board and I are confident that his unique combination of commercial and financial expertise makes him ideally suited to lead Meritor at this important time in our history. Now I'll turn the call over to Jay. Jeffrey A. Craig - President & Chief Operating Officer: Thanks, Ike. First, let me say that I'm honored to be Meritor's next CEO. We've made significant progress toward achieving our three year plan during Ike's tenure. I am looking forward to continuing that collaboration with him in his new role as Executive Chairman. I appreciate the board's and Ike's vote of confidence and I'm enthusiastic about the opportunity to work closely with him as we take Meritor to the next level. This is a unique company because of the passion and commitment of our 9,000 employees. The depth of that commitment has become even clearer to me as I've led the operations over the past few years. I joined Meritor in 2006 and although it was a company in transition, I knew I had joined an organization with a solid foundation and the potential to drive value creation for our shareholders, customers and employees. I was energized to be part of a team with more than a 100-year legacy of innovation and expertise in commercial drivetrain solutions. I'm even more energized today as we successfully execute our M2016 plan and enter a new chapter in our history. Let's now look at slide five. As we continue to deliver strong results, I'm confident that we will achieve the three overriding objectives of M2016. Our execution continues to be solid in a very strong North American truck cycle that has obviously tested the entire supply chain. The team has driven significant improvements in material, labor and burden performance, which are favorably impacting our bottom line financial results. As orders continue to be strong in North America with a backlog-to-build ratio of approximately six months, we continue to successfully convert on incremental sales through excellent management of our operating and product costs. We previously said we would achieve a 10% EBITDA margin, but only at certain levels of revenue. Given our strong execution to-date and robust pipeline of performance and revenue initiatives heading into next year, we now believe we will achieve that margin without any significant change in our end markets. During the last two years, we've also generated significant cash flows from operations, the settlement of the Eaton litigation and the sale of a non-core business that has allowed us to reduce our net debt by nearly $500 million. Overall, this performance has provided us with the balance sheet improvement necessary to grow with our customers, and we are. We're winning new business with global manufacturers like PACCAR that we just announced last quarter, among many others. As a result, we're more than 60% of the way toward achieving our $500 million target in new business wins and we remain confident that we'll achieve our full run rate. Each award solidifies our position as a leading supplier to every major truck OE in the world. Our mission is to provide these manufacturers with products that their customers need in each local market. Meritor products are designed and manufactured for maximum efficiency with the highest standards in durability and reliability. To complement our growing product portfolio, we also offer outstanding support in the field. Our team helps customers optimize their businesses from product specification to aftermarket service and support. It's all part of the Meritor value proposition that I believe in very strongly. After spending years with the company in finance followed by several more on the commercial side, I have a tremendous appreciation for our people and their talent, the incredible value of our products, our customers and the importance of the trucking industry overall. Before we move on, let me say that I'm confident we will continue to meet our commitments and by doing so drive enhanced value for our shareholders. I'm looking forward to the opportunity to lead such a great company that has so much potential. Now, let's move to slide six. As we said, we're driving higher levels of excellence throughout our operations and improving new net material performance. With an aligned focus on these activities around the globe, we are seeing outstanding results, some of which are highlighted here. In February, we told you that we've put some of our best executives and resources on labor, burden, and material performance, because these are areas we can control and we are leveraging them to drive expanded EBITDA margins. But, it doesn't end there. We're continuing to identify areas for improvement, not only in labor, burden, and material, but also in delivery, quality and safety. Collectively, the improvements we're making in these areas are enabling us to meet the challenges of higher production levels, first in Europe last year and now in North America, with near perfection. Let's go to slide seven. Looking into the future, we believe that there is significant revenue potential with an expanded product portfolio. This is a critical element of our plan as it relates to future growth. We have prioritized the 20 most important product launches for the company and are driving them to flawless execution. The result of this focus is that our current launch cycle is the most aggressive in our company's history, and most important, each of these products has a home. We've worked with our customers to design axles, brakes, drivelines and suspensions that will enhance the value of their vehicles in alignment with their forward product programs. Launching next month in India is our hub reduction axle targeted at severe service and off-highway applications for emerging markets. This axle is based on Meritor's current hub reduction design that's provided outstanding performance in harsh applications for more than a decade. This product will launch in India with our customers Daimler and Ashok Leyland. In August of this year, we'll offer the super-fast 2.28 ratio on the 14X platform that can be integrated with Meritor's RPL 35 driveline, which was successfully launched this year. This product combination will effectively handle higher torques from downspeeding, allowing the driver to maintain vehicle speed at lower engine RPMs and enhancing vehicle efficiency. And next year, we'll launch the 14X high efficiency tandem axle that will offer more than a 1% efficiency improvement over our current class leading 14X, which translates to roughly a 1% fuel savings for our customers. In our Defense business, Meritor has been a strategic partner in Lockheed Martin's Joint Light Tactical Vehicle program since 2007. We've completed more than 400,000 miles of testing to-date on our ProTec suspension that increases vehicle speed and improves handling and ride control. As you know, the JLTV program is planned to be awarded by the government in the summer of this year. However, full run rate production would not be achieved until 2018. We highlight it here because of its significant long-term revenue potential. These are just a few examples of the innovative products we're launching that create the pipeline which will support our growth beyond 2016. Now let's turn to slide eight for our current fiscal year 2015 market outlook. In North America, we continue to believe, as we told you last quarter, that the strong backlogs and low cancellation rates will carry current production levels through the first quarter of fiscal 2016. We're holding our current outlook for Class 8 volumes in this region to a range of 305,000 units to 315,000 units. Our forecast for medium duty production is unchanged as well. Europe remains flat from our previous forecast at a midpoint of 390,000 units. In South America, we've lowered our production outlook to a midpoint of 95,000 units for the fiscal year. Consumer and business confidence continue to fall, driven in part by the political situation in Brazil. Long-term forecasts indicate a slow economic recovery, with GDP decreasing and interest rates increasing in the near-term. Specific to the commercial truck market, revisions to the FINAME program, used to finance more than 70% of truck and bus purchases in the country, has made it significantly more expensive to purchase a commercial vehicle. Even without the negative impact of currency that we're seeing, the Brazilian production headwinds alone are driving our 2015 revenue expectations lower by nearly $100 million from our prior guidance. Finally, we expect China to be down an additional 20% from our prior outlook due to continued economic headwinds. The deterioration in these international markets combined with the unfavorable currency impact from the depreciating real and the euro are driving our revenue expectations lower for the year. Kevin will provide the full update on our 2015 guidance later. As I said earlier in the call, however, we're confident in our ability to achieve our margin target of 10% in fiscal 2016. We are anticipating significantly less help from the global markets than originally planned when we launched M2016, but we have outperformed expectations in the areas we've highlighted. Now, I'll turn the call over to Kevin. Kevin Nowlan - Chief Financial Officer & Senior Vice President: Thank you and good morning. Let's turn to slide nine. On today's call, I'll review our second quarter financial results and then I'll take you through our revised 2015 guidance. Overall, the key takeaway you'll see from our results is that we continued to improve our financial performance while facing challenging global markets including currency headwinds from the strengthening U.S. dollar. Our M2016 strategies are continuing to generate margin performance and bottom-line EPS that is overcoming all of these headwinds. As a result, in the second quarter we generated adjusted EBITDA margin of 10.1% and $42 million of adjusted income from continuing operations. So, let's walk through the details on slide nine, where you'll see our second quarter income statement for continuing operations compared to the prior year. Sales were $864 million in the quarter, down $90 million or 9% year-over-year. Sales were negatively impacted by $55 million, largely because of the weaker Brazilian real and euro. Lower production in South America and China, as well as lower revenue from our Defense business, also contributed to the decrease. This was partially offset by the continued strength of the Class 8 truck market in North America. Gross margin as a percent of sales was 13.3%, reflecting a 90 basis point improvement over the prior year. This improvement was driven by continued material labor and burden performance and pricing actions consistent with our M2016 strategy, as well as some non-recurring gains on foreign exchange hedges. I'll provide more detail on this later. SG&A was $9 million lower in the second quarter. The decrease was due to lower variable incentive compensation accruals and lower pension expense. Restructuring costs were $3 million this quarter and were primarily related to severance costs associated with restructuring actions taken in our European truck business. Interest expense was $21 million in the second quarter, compared to $48 million a year ago. The decrease was mostly due to the loss on debt extinguishment that was recognized in the prior year relating to the repurchase of our 10-5/8% notes due in 2018. Interest expense was also lower year-over-year due to the benefits we're now experiencing from the capital market transactions we executed last year. Income tax expense was $6 million in the second quarter, representing a decrease of $2 million compared to the prior year, despite the fact that pre-tax income was higher this year. Our effective tax rate was only 13% this quarter. We're beginning to generate earnings in jurisdictions such as the U.S. and parts of Western Europe where we previously established reserves against our deferred tax assets. All of that totals up to adjusted income from continuing operations of $42 million or $0.41 per diluted share. Slide 10 shows second quarter sales and segment EBITDA for Commercial Truck & Industrial. Sales were $681 million, down $82 million or 11% from the same period last year. We saw lower production in South America, China, and Defense, and experienced approximately $53 million of FX headwinds in this segment. These revenue headwinds were partially offset by higher sales in North America due to the strong Class 8 truck market. Segment EBITDA was $57 million, which was flat compared to the prior year. However, segment EBITDA margin was 8.4% in the quarter, representing a 90 basis point improvement. A combination of continued strong material and operational performance, pricing actions, and gains from foreign exchange hedges, more than offset the unfavorable revenue and mix impacts associated with lower commercial vehicle demand in South America and lower Defense revenue. Next on slide 11, we summarized the Aftermarket & Trailer segment financial results. Sales were $212 million, down $13 million from last year, due to currency headwinds in our European aftermarket business. Segment EBITDA was $30 million, up $6 million over last year. Similar to our Commercial Truck & Industrial segment, the increase was driven by continued strong execution of material and operational performance and pricing. Now let's move to slide 12, which shows the sequential adjusted EBITDA walk from Q1 to Q2. Walking from the $79 million of adjusted EBITDA generated in our first quarter, the net impact of volume, mix and pricing was roughly flat for the quarter. The impact of higher sales in North America Truck in India was offset by lower sales in South America. We continued to execute on our M2016 objectives of achieving material, labor and burden savings. These initiatives along with slightly lower steel prices provided an incremental $5 million benefit sequentially from the first quarter. Next, we experienced a $28 million foreign exchange translation impact on sales. The translation and transaction impacts of foreign currencies negatively affected EBITDA by $4 million. However, as I previously mentioned, during the quarter, we recognized mark-to-market gains associated with several foreign exchange hedges that were put on to protect against certain transaction and translation risks. First, in April 2014, we bought option contracts to mitigate foreign currency exposure on expected Indian rupee purchasing activity through the end of 2016. In the quarter, we've monetized these contracts and simultaneously entered into a new series of contracts that now extend through the end of fiscal year 2017. We also generated mark-to-market earnings on option contracts that we purchased last quarter to mitigate volatility in the translation of Brazilian earnings into U.S. dollars during 2015. Although these FX contracts are hedging actual exposures of the company, they do not receive hedge accounting treatment for U.S. GAAP purposes. As a result, the gains we've recognized this quarter represent the mark-to-market benefit associated with underlying economic exposure for both this quarter, some of which you see noted as a negative in the line item above, and future quarters. In the second quarter, these hedges generated a $6 million one-time benefit to our results. So, as you think about our go-forward earnings profile, you should assume that this benefit will not repeat in future quarters. Finally, we had an other net increase in EBITDA of $1 million. This includes a couple million dollars of additional one-time gains that we do not expect to repeat. Overall, this was a strong quarter for us, even considering the revenue headwinds. We generated $87 million of adjusted EBITDA, which resulted in an adjusted EBITDA margin of 10.1%. And even if you exclude the favorable one-time items in the quarter, we still would have generated adjusted EBITDA margin north of 9%. Now, let's turn to slide 13. For the second quarter, total free cash flow was $27 million, representing an $18 million improvement over the same period last year. The increase was due to higher earnings and lower outflows associated with our off-balance-sheet factoring programs. Our year-to-date free cash flow was slightly positive, which is a little better than where we were this time last year. This performance puts us on track to achieve our $100 million free cash flow guidance for 2015. Now, let's move to slide 14, which provides an update on our equity and equity-linked repurchase program. During the second quarter, we commenced our $210 million buyback program. We repurchased 1.2 million of common shares during the course of the quarter, utilizing $16 million of cash. We also repurchased $15 million of our 4% convertible notes due 2027. In total, we essentially utilized the free cash flow we generated in the quarter to repurchase $31 million of equity and equity-linked securities, which puts us right on track to complete the program by September 2016. From an EPS perspective, we received only half a quarter's worth of benefit associated with the share repurchases. In future quarters, we will get the full benefit of the 1.2 million in common equity repurchases executed during Q2. This will help to offset any dilution impact associated with our 7-7/8% convertible notes due 2026, which were dilutive by about 3 million shares in the quarter. Next, I'll review our updated fiscal year 2015 outlook on slide 15. Based on the demand assumptions Jay highlighted on slide eight and the continued strengthening of the U.S. dollar, we have lowered our fiscal year 2015 sales guidance to a range of $3.5 billion to $3.55 billion. Lower production expectations in Brazil and China are negatively impacting revenue by $120 million. You can see our new currency assumptions reflected on the slide for the second half of 2015. The continued depreciation of foreign currencies is creating $40 million of additional revenue headwinds since we provided guidance in Q1. Despite the decreased revenue outlook, we're slightly increasing our margin outlook. We now expect to achieve an adjusted EBITDA margin in the range of 9.0% to 9.2% compared to our previous guidance of approximately 9%. We expect to drive this margin result largely through continued strong execution of our M2016 initiatives. Our effective income tax rate is now expected to be approximately 15% for 2015 compared to our previous guidance of approximately 20%. Lower earnings in tax-paying jurisdictions like Brazil and China are being offset by continued improvement in earnings in non-taxpaying jurisdictions like the U.S. and much of Western Europe. Driven primarily by this improvement in the effective income tax rate, we are also raising our adjusted diluted earnings per share from continuing operations guidance to a range of $1.30 to $1.40 for fiscal year 2015, which is an increase of $0.10 compared to our prior guidance. And finally, as I mentioned earlier, we continue to expect free cash flow to be approximately $100 million for 2015, which means we're expecting back-to-back years of cash flow at or above the $100 million level. The bottom line is that we're expecting production in South America and overall currency impacts to be worse than we previously thought, but despite that we're expecting bottom-line earnings to improve and cash flow to remain right on track. Now, I'll turn the call back over to Jay to provide some closing remarks. Jeffrey A. Craig - President & Chief Operating Officer: Thanks, Kevin. Let's turn to slide 16. As Ike said in the beginning of the call, this is an exciting time for us. We are taking a disciplined approach to improving the performance of the company. M2016 is really about securing our base business by taking actions that drive excellence throughout our global operations, enhancing customer relationships and executing a robust product development cycle and improving material performance in a sustainable way. M2016, we sharpened our focus under the program and we defined the nine initiatives that we believed would create the transformation we needed at Meritor to improve our financial performance, and we made sure that every resource in the company was dedicated to it. It's now been approximately two years since we launched this program; our focus has not changed. With just over a year-and-a-half left, we are determined to deliver on our commitments. The actions we've taken since launching M2016 continue to drive solid bottom-line performance in spite of currency depreciation and volume declines. These are among the best EBITDA margin, net income and free cash flow results we have ever had. Ike and I, together with the entire management team, are fully committed to achieving the objectives of this plan. So, what does Meritor look like for shareholders in 2016 upon completion of the plan? We will have reduced the volatility associated with our industry through improved cash flow and lower debt levels. We will have a leaner fixed cost structure, improved operating footprint and a differentiated product base. We'll have built a culture of innovative thinking in all areas of the business and ultimately we will have provided a strong return on investment for our shareholders. With that, we'll take your questions.

Thank you. And your first question comes from the line of Itay Michaeli of Citi. Please go ahead.

Hi, guys. Thank you so much. This is actually Justin Barell on behalf of Itay. Ike, Jay, congrats. The first question that I have I guess really is for Jay. With regards to the first 100 days for your plan, is there anything that we should expect any changes on or can you give us maybe a walkthrough of what you guys are expecting for the first 100-day plan for you? Jeffrey A. Craig - President & Chief Operating Officer: Thanks a lot for the question, Justin. The short answer is no. I mean, I think the execution and performance of the company has been nothing short of outstanding and we want to continue to execute the M2016 plan. As you can see from our revised guidance today that execution has been very strong, but we still have roughly 100 basis points of margin improvement that we expect to execute before the end of the plan. And it's certainly my job and with Ike's assistance to make sure that we just continue to stay focused on that.

Perfect. Thanks so much. And then, can you give us a sense of maybe an update on Defense quoting that you guys are involved with, just to kind of gauge the vertical and see how everything's progressing? Jeffrey A. Craig - President & Chief Operating Officer: Well, like I mentioned in my comments, the primary program we're focused on is JLTV. We expect that award towards the latter part of the summer, and so we are waiting for that award. But in the comments I mentioned in the Analyst Day, the one thing I'd like to make clear is our belief in hitting our objectives of M2016 is not dependent upon the award to us of that program or any other single program.

Perfect. And then, I believe on the call, it was mentioned that the slightly lower steel commodity prices, you guys are having a modest tailwind. Can you give us a sense of how to think about that for the – through the end of fiscal 2015? Kevin Nowlan - Chief Financial Officer & Senior Vice President: Yeah. This is Kevin Nowlan. Thanks, Justin. Yeah, the steel tailwind in the quarter for us sequentially was about $2 million. So, when you look at that $5 million sequential improvement in material, labor and burden, $2 million of it came from steel. With where indices are in steel right now, we'd expect a little bit of additional tailwind into Q3, but then we would expect to start giving that back through our passthrough mechanisms to customers in Q4 and into the beginning of 2016. So, it becomes a headwind at the back half of the year and into 2016, but it's a little bit of a tailwind this quarter.

Perfect. And then, so in terms of the normalized cadence throughout the year, should we expect something similar to what 2014 was for the back two quarters? Kevin Nowlan - Chief Financial Officer & Senior Vice President: Cadence in what regard? I'm sorry, Justin.

Just overall financial cadence. Essentially, the quarter-over- quarter improvements and everything like that. Kevin Nowlan - Chief Financial Officer & Senior Vice President: Yeah. I think it's right. I mean, I think if you cut through what our guidance is suggesting, you would expect that the back half of the year is going to be much closer to 9% and in part because generating 10.1% is based on a lot of proactive actions we took to hedge some of the exposures we have and to execute on our operating performance. But those hedges aren't going to repeat in the back half. So, when you eliminate those non-recurring items or those one-timers for the quarter, our run rate's probably right now closer to 9% than it is to 10%.

Right, okay. And then, just one final question that I want to ask on the South American outlook. Just trying to figure out exactly how much of the delta between your prior outlook versus the current outlook is driven by pessimism versus the financing terms? Is there a right way to think about that, like what's driving what and just exactly -- if you were to bucket the majority of the delta, would that fall more under just the general pessimism of the market or is that really just predicated on the financing programs? Jeffrey A. Craig - President & Chief Operating Officer: All right. I think the two are very interlinked. I mean, obviously, Brazil's economic reforms they're executing are pretty far-reaching. As I mentioned in my comments on the call, the impact to us directly through the commercial vehicle program is the FINAME program, but I think our revised outlook is really driven by just the overall macroeconomic conditions.

Perfect. Thank you, guys, so much and again, congrats, guys. Thank you. Jeffrey A. Craig - President & Chief Operating Officer: Thank you.

Thank you. And your next question comes from the line of Brian Johnson of Barclays. Please go ahead.

Hey. Good morning and congratulations, Jay, and hope, Ivor, you'll – Ike, you'll stay around for a while. Just a technical question, then a broader question. My technical question is the FX hedge impact, and this goes to your background, Jay, under I guess, what is it, FAS 133 that you have hedge gains realized before the offsetting underlying transactions. Can you give us a sense of just how that affected that? Are these covering up for – or not covering up -- are these sort of transactional exposures that are going to be either a headwind in later quarters or were actually in the quarter but you're calling those out separately? Jeffrey A. Craig - President & Chief Operating Officer: I appreciate your confidence in my memory skills, but obviously my CPA days are many years behind. But I think the company has done an excellent job of both hedging transaction risk, but on a limited basis, hedging some translation risk as well. But I'm going to turn your specific question over to Kevin. Kevin Nowlan - Chief Financial Officer & Senior Vice President: Hey, Brian, it's a fair question. I mean as you look at the $6 million of gains that we booked about $4 million of that $6 million relates to 2015 activity, the bulk of that being in the current quarter, and then some of that extending beyond the quarter, which means there is a couple million dollars of the hedge gains that we generated in the quarter that relate to future periods, which is really some of the rupee, euro purchasing activity that we've been hedging. So as we've been executing on our best-cost country sourcing initiative, we've been hedging out the curve two years and three years of purchasing activity to make sure that we can reap the benefits for the longer term on those programs. And so we continue to have hedges on the books to hedge against that activity going forward. So while we're not going to get that $2 million benefit anymore, we're going to continue to have a hedge position that protects against some of those currency moves.

Okay. I guess the broader question is you kept your Class 8 outlook unchanged. If you look at ACT, it's up to 335,000 now. Are you being – two questions, kind of are you being conservative, or do you see weakness in the back half of the year? I guess, two, if there is a run rate of 330,000, maybe it continues into next year, it goes up. Where are you vis-à-vis capacity? In particular, are you talking about a customer a couple quarters ago who was apparently building some in-house capacity to handle peaky kind of demand, kind of where does that stand if we have a market running in the 330,000s versus the 310,000s? Jeffrey A. Craig - President & Chief Operating Officer: Well, I think just to answer the question in sections, we feel very good about our capacity, I mean we've run quarters of production roughly at 80,000 units for a quarter. And if you look at our forecast, it's really stating that the production levels will remain roughly at where they are today. I mean this last quarter was close to 80,000 units and we're seeing that the – our forecast for the Q3 and Q4 is that they stay within 75,000 units to 80,000 units. So I think we're confident in where our forecast is. And so far we have not had any capacity issues in meeting our customers' demand, and in fact, have been able to fill some shortfalls elsewhere in the supply chain.

And similarly in Europe, you remain conservative there, some of the customers, again, Daimler, are seeing some upside there. Is this kind of, more kind of you think it's more your fiscal 2016 or you just want to be conservative for now? Jeffrey A. Craig - President & Chief Operating Officer: That's exactly it, Brian, is it's really, I think our outlook is very similar to what you've heard recently from some of the European OEs. There is really two impacts of fiscal year to calendar year comparison. We have obviously the negative impact of the pre-buy that occurred late in 2012 – 2013, and then missing the fourth quarter here of 2015. So if you neutralize for those two impacts, we have a very similar outlook to what you've heard from the European OEs recently.

And back to North America, if North America fiscal 2016 runs sort of 335,000 or higher, are you comfortable a) with the capacity and b) that the customers aren't going to be taking stuff you'd like in-house? Jeffrey A. Craig - President & Chief Operating Officer: Well, we are not really talking about any outlook yet for 2016, as you know, because of our – where our fiscal year falls, we end up being one of the first people to talk about that. But we're not ready yet at this point. In terms of our capacity, I think we feel very comfortable and very closely aligned with all our customers, including our growing relationship with PACCAR, that we can meet their needs based on what they're forecasting for production for the foreseeable future.

Okay. Thanks.

Thank you. And our next question comes from the line of Neil Frohnapple of Longbow Research. Please go ahead.

Hi. Good morning and congrats, Ike and Jay, on today's announcement as well. The 10% EBITDA margin in FY2016, you believe you can now achieve without any significant change in end markets. So just to clarify, would that be essentially based on FY2015 sales guidance range and then layering in incremental PACCAR business, or do you still need modest end market growth? I think before you kind of had called out like a $4.2 billion type number. Could you just provide some more granularity on that? Jeffrey A. Craig - President & Chief Operating Officer: Well, I think the way we look at it is if the global mix remains roughly the same and if we include the wins that we have achieved and reported out previously, we believe we can hit the guidance. So, yes, it includes the PACCAR win. And so, that gives us the confidence that we can achieve that margin target.

All right. Great. And then, regarding the expected market share recapture at DT&A for axles next year, have you seen any order activity yet for next year that would support that or is it still too early to tell at this point? Kevin Nowlan - Chief Financial Officer & Senior Vice President: Actually, we feel confident in the statement that we made at the Analyst Day back in February that this was temporary, it's been rectified, and we're comfortable that it's meeting both ours and Daimler's expectations of where our penetrations would be. And more importantly, Daimler has been extremely pleased with our deliveries and that we've been part of their, helping them drive their sales success.

All right. And then, maybe one last one for Kevin. The $6 million in hedge gains, do you have the breakdown by segment? Kevin Nowlan - Chief Financial Officer & Senior Vice President: The bulk of it is Commercial Truck & Industrial, but there is a little bit more than $1 million in the Aftermarket & Trailer segment as well.

Okay. Thanks very much, guys.

Thank you. And your next question comes from the line of Kristine Kubacki of Avondale Partners. Please go ahead.

Good morning. I was just – we've been watching -- most of the global OEMs, they've kind of reversed their outlook and upgraded their outlook on India. I was just curious on why you didn't increase your forecast there. Kevin Nowlan - Chief Financial Officer & Senior Vice President: We're certainly seeing growth in India as well. I think you're seeing people talk about a 10% market increase, and we're roughly seeing that as well, but the impact on our overall forecast is not significant. So, and a lot of that increase will start to come towards the end of the calendar year, given our fiscal year-end of September 30. But definitely the Indian market is strengthening. I think people can clearly say it's found bottom and it's recovering. And it's recovering well for our customer Ashok Leyland as well.

That's helpful. And then I guess, you talked a little bit about the restructuring activities have been kind of centered around Europe. I was wondering – I hope there is going to be an eventual upturn in markets of China and Brazil. I guess, how are you prepared for, have you taken any restructuring activities in those markets and then how are you prepared if the market moves quickly on you to the upside? How do you respond to that? Kevin Nowlan - Chief Financial Officer & Senior Vice President: This is Kevin, I'll take that. I mean with Brazil, I think we got out ahead of it, to be honest. We took some restructuring actions, you'll recall, back in August 2014, so at the tail end of last fiscal year, when we saw this, the headwinds really starting to mount in Brazil. And you can imagine as we look forward, we'll continue to monitor that market and see if there are additional actions that we need to take in light of where the market currently is. So, we'll keep an eye on that and keep looking at that as we go forward. And then, as you can imagine, as we did in Europe, we look at other markets as well just to see if there are other areas where we should be focused to improve our cost structure. So, always something that we're looking at as we go through these difficult international markets.

But you could prepare for an upturn pretty quickly. There has no -- been major structural changes in those markets that you can prepare for a recovery that's -quickly? Jeffrey A. Craig - President & Chief Operating Officer: We feel confident we can respond to a recovery. We're in constant communication with our customers in all markets and informing them of our restructuring actions and what our ability is to provide them axles and brakes as the markets recover.

And then I just want to clarify one thing. You talk a lot about the Western European market. You don't have any exposure to Eastern Europe or Russia? Jeffrey A. Craig - President & Chief Operating Officer: Very limited other than through our primary customer, Volvo. They have some exposure in Eastern Europe. Kevin Nowlan - Chief Financial Officer & Senior Vice President: Yeah, and on the Aftermarket side, I think we talked that in prior quarters. It's less than $20 million of revenue that goes into Russia, in the $10 million, $20 million range.

That's helpful. Thank you very much. I appreciate the time.

Thank you. And our next question comes from Patrick Archambault of Goldman Sachs. Please proceed. Patrick K. Archambault - Goldman Sachs & Co.: Yeah. Hi, good morning. And yeah, congratulations, Jay, as well. Very much looking forward to working with you in your new role. And Ike, we've definitely appreciated the leadership and the transition that we've seen in this company under your direction as well. So, congratulations to you both. Just in terms of my questions, wanted to just follow up on the PACCAR item. I know that was something that was potentially impactful near-term. Have you been seeing the kind of take rate in PACCAR orders on the back of the change of standing in the quoting book? I guess that would be my first question. And then a second one would be just on Europe. I think there had been some discussion that within Europe, even though the outlook for the market is still relatively flat, some of the northern companies, kind of like Volvo and Scania have been doing a little bit better than some of the other guys, and just wanted to get your sense of if that's something you're seeing on the ground there as well. Jeffrey A. Craig - President & Chief Operating Officer: Sure. Well starting with PACCAR, we're very pleased, I would say overall we're seeing our penetrations increase at the pace that both us and PACCAR expected them to, and we see our relationship broadening every day, particularly with their operating units of Kenworth and Peterbilt. So. just on track, is what I would say. And I believe that's a view held by both sides, that we are very much on track. In terms of Northern Europe, certainly has been the story since the economic downturn, is that has tended to be stronger. But again, our primary customers are Volvo/Renault, and they've had a bit of a mixed market experience because of their Renault exposure, and Iveco, which tends to be more Southern Europe exposed. But, I would say overall on our European business, we are very pleased with its performance. And back to an earlier question, we have taken the restructuring actions that, where we're very pleased with the profitability of that business and are prepared to operate it at these volume levels if necessary for longer and be pleased with the performance. Patrick K. Archambault - Goldman Sachs & Co.: Okay. Terrific. That's all I had for you guys. Thanks a lot.

Thank you. I'd now like to turn the call over to Carl Anderson for closing remarks. Carl D. Anderson - Treasurer, VP & Head-Investor Relations: Thank you, Alison, and thank you, everybody for joining the call today. This does conclude Meritor's second quarter 2015 earnings call. Thank you.